Pain in store for FMCG stocks? El Niño could drag rural recovery, says Nuvama

El Niño, which occurs every three to six years, could derail the recovery in the rural FMCG (fast-moving consumer goods) market, believes Nuvama Institutional Equities.

El Niño is the abnormal heating up of surface ocean waters that lead to changes in wind patterns and impacts weather across the world. The US government’s National Oceanic and Atmospheric Administration has indicated the possibility of El Niño conditions developing this year.

In India, the last El Niño event of 2018 coincided with below-normal rainfall, notes Nuvama.

“Since then, India witnessed four good monsoons in succession. Hence, the probability of a fifth normal monsoon looks a bit challenging at this stage,” it added.

Rural demand has been reeling under inflationary pressures in the post-pandemic era. This is evident from the declining volumes for FMCG companies.

According to a report released by data analytics firm NielsenIQ, in October-December, the FMCG industry grew 7.6 percent in terms of value but its volume growth declined 0.3 percent.

Of this, urban volumes grew by 1.6 percent year-on-year while rural volumes declined by 2.8 percent.

Things were slowly taking a turn as inflation started cooling off gradually from its peak in the later part of CY22. Hindustan Unilever said the company saw some green shoots in the rural market in Q3. Dabur’s Mohit Malhotra also said that the demand slump had ‘bottomed out’.

The El Niño Effect

Now, the adverse weather conditions could be a roadblock to this recovery. Rainfall deficit is a major cause of the rural slowdown because it affects crop sowing and farm income.

In FY23, states such as Uttar Pradesh, Bihar, West Bengal and Jharkhand reported rainfall deficit that affected paddy sowing. “Hence, the El Niño conditions remain a key monitorable that can hinder rural slowdown turnaround in India,” believe Nuvama analysts Abneesh Roy and Rushabh Bhachawat.

Since rural India constitutes about 36 percent of the sales pie for a typical consumer company, FMCG fortunes could be in danger. In the present calendar year so far, Nifty FMCG has gained 21 percent, outperforming the Nifty50, which is down 1.9 percent.

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